I remain convinced that fears over a worsening supply/demand balance in the oil market will keep investor enthusiasm for fossil-fuel leviathans BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) under pressure for some time to come.
My sentiment was given fresh fuel during the weekend by shocking Chinese trade data that showed imports of oil volumes slump 7.9% during January, once again underlining the extent of flailing domestic industrial activity. This latest report comes as a major worry as China is responsible for around a third of worldwide oil demand, second only to the United States.
And the scale of the slowdown on the world’s factory floor was highlighted further by reports that total Chinese imports slumped an eye-watering 19.9% last month, the biggest decline for almost six years.
The steady stream of poor economic releases from China shows no signs of easing, and this weekend’s poor trade data follows disappointing official manufacturing PMI numbers which showed output in January slip into contraction for the first time since the summer of 2012.
Dire demand undermines profit prospects
Not surprisingly industry analysts are marking down their forecasts for Chinese energy demand in the near term and beyond, and markets becoming increasingly concerned that recent stimulus measures introduced by the People’s Bank of China are failing to stoke domestic consumption and underpin confidence in the country’s growth prospects.
The International Energy Agency (IEA) has already said that it expects demand from Beijing to clock in at 2.5% this year, down 20 basis points from 2014 levels. But as lawmakers struggle to rebalance the economy from an investment-geared one to a model driven by consumers, and financial conditions in critical European end-markets continue to deteriorate, even these forecasts could be deemed optimistic.
In response to a worsening demand outlook, both BP and Shell are aggressively battening down the hatches as profits plunge. Last week BP announced it was scaling back capital expenditure this year to $20bn, down from its previous guidance of between $24bn and $25bn. This follows news that its competitor would slash outlay by $15bn over the next three years.
Undoubtedly signs that US shale producers are cutting back on production is a step in the right direction to addressing the glut of supply in the oil market. But with industry cartel OPEC vowing to keep pumping even if prices fall as low as $20 per barrel, and stuttering global activity heaping further pressure on the market balance, I believe that BP and Shell can expect much more trouble at the bottom line.